July 21, 2015 Volcker Rule Compliance Date Approaching | Practical Law

July 21, 2015 Volcker Rule Compliance Date Approaching | Practical Law

The compliance date for banks to conform their proprietary trading activities and investments in and relationships with non-legacy covered funds under the Volcker Rule is July 21, 2015. Extensions have been granted for legacy covered funds.

July 21, 2015 Volcker Rule Compliance Date Approaching

Practical Law Legal Update 3-616-7431 (Approx. 3 pages)

July 21, 2015 Volcker Rule Compliance Date Approaching

by Practical Law Finance
Published on 25 Jun 2015 • USA (National/Federal)
The compliance date for banks to conform their proprietary trading activities and investments in and relationships with non-legacy covered funds under the Volcker Rule is July 21, 2015. Extensions have been granted for legacy covered funds.
All banks and banking entities subject to US prudential banking rules must conform prohibited proprietary trading activities and investments in and relationships with non-legacy covered funds to the Volcker Rule by its effective date of July 21, 2015. Non-legacy covered funds are those investments in and relationships with a covered fund made after December 31, 2013. In December 2014, the Federal Reserve Board (FRB) announced that it will provide banks with two one-year extensions, until July 21, 2017, to conform investments in and relationships with covered funds and foreign funds, including certain CLOs, that were in place prior to December 31, 2013 (legacy covered funds) (see Legal Update, Fed Grants Additional Volcker Extension for Legacy Covered Funds and Swaps and Derivatives Compliance Calendar). These extensions do not apply to proprietary trading and non-legacy covered funds.
The Volcker Rule defines proprietary trading as engaging as a principal for the trading account of the banking entity or non-bank systemically-significant financial institution (SSFI) in buying or selling certain covered instruments. Proprietary trading generally means buying and selling investments for the bank's own trading accounts rather than for the accounts of its clients. Covered instruments include any security, derivative or contract of sale of a commodity for future delivery, as well as any option on any of these and any other security or instrument that the federal banking agencies, the SEC and the CFTC may determine.
The Volcker Rule contains important statutory exclusions (permitted activities) for proprietary trading, including:
  • The buying and selling of securities issued by the US government and certain government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, as well as state and municipal obligations.
  • The buying and selling of securities in connection with underwriting or market-making activities to the extent these activities are designed not to exceed the reasonably expected near-term demands of clients, customers or counterparties.
  • Certain risk-mitigating hedging activities.
  • The buying and selling of securities on behalf of customers.
  • Proprietary trading conducted solely outside the US by a non-US banking entity that is not directly or indirectly controlled by a US banking entity.
  • Investments by insurance companies under certain circumstances.
  • Any other activities the federal banking agencies, SEC and CFTC determine would promote and protect the safety and soundness of the banking entity and US financial stability.
As the compliance date approaches, most banks already have divestiture programs well underway.
For more information on proprietary trading under the Volcker Rule, see Practice Note, Summary of the Dodd-Frank Act: The Volcker Rule: Proprietary Trading.